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Since the usual narrative about the Greek economy after the Euro introduction involves a large movement of resources and employment towards the non-tradable sector, it is interesting to check this claim against available data. I will be using the Ameco database and looking into the sectoral contributions on total Gross Value Added and Employment between 1995 and 2008 (in order to account for pre-Euro effects and not pollute the statistics with the post-2008 crisis).

Greek GVA Contributions by sector

Services GVA contribution did increase steadily from 71% during the mid-1990s to 78% in 2008. Nevertheless, excluding 2008 (which included a large fall in the industry contribution), almost all of the fall is attributed to lower agriculture GVA contribution (from 7.4% in 1995 to 3.5% in 2007, a fall of 4%). Industry only fell from 14% in 1995 to 12% in 2007. Although industry certainly lost ground (and was much lower than the Euro average of 20%), it seems that most of the change in GVA contributions is due to the Greek economy transitioning to a more ‘mature’ form with agriculture moving closer to the Euro area average of 2%. On the other hand, services contribution increased from 71% to 76% (in 2007), moving higher than the long-run Euro average of 71% (which was quite steady during the same period). Building and construction certainly do not show any signs of a bubble, except for a short period of time during 2006-2007.

Greek Employment by sector

The above observations are even more evident in the employment front. Industry shows a small drop in employment contribution (from 13.5% to 11.6%) which could be attributed to higher productivity while agriculture is the main sector losing employment, with its share falling from 19.3% to 11%. The primary source of employment growth is the services sector which increases from 60.5% to 69% during the same period.

Overall, although the long-run industry contributions are far lower than the Euro average, the Greek economy rebalancing during the Euro era is a result of its GVA composition ‘maturing’, with agriculture moving closer to European averages and the relevant resources and employment being absorbed by the services sector. Compared to the Euro averages (20% industry, 71% services), it is true that the movement went on the ‘opposite direction’, with the services sector growing to the disadvantage of industry (12% industry, 76% services), probably as a result of easy credit conditions.

Looking at more detailed data from the Greek statistical agency, land and water transport services contributions increased from 4% in 2000 to almost 7% in 2008 while ‘Accommodation and food and beverage service activities’ fell from 7.4% to 5.6%. As a result, the data are rather mixed about if the increase in the services sector contribution came from tradable or non-tradable parts. It seems that a large part of the 5% change (but certainly not all) can be attributed to non tradables.

Taking the above at face value, around 3-4% of GVA (and a corresponding part of employment which is equal to around 200,000 persons) should have moved to the tradable sector since 2008. The rough size of this ‘overshooting’ certainly cannot account for the enormous loss of output and employment since 2008 which can only be attributed to the negative credit conditions and fiscal austerity. The price paid for a relatively small adjustment is quite high.


Following on recent posts on the Greek balance payments I ‘d like to examine one unintended consequence of the OMT. As long as they are successful, they should be bullish for the Euro exchange rate since they will reduce tail risks of Euro breakup. An appreciated exchange rate would create pressures on export led recovery, especially since during the last 12-months the Eurozone current account has reversed by an amount equal to 1% of Euro GDP. In such a case it is interesting to determine who will be the major winners and losers:


The above are Real Effective Exchange Rates with 35 industrial countries (outside the Euro) from the Ameco database, calculated based on ULCs (2000 is the base year). It is clear that most of the periphery, with the exception of Italy, will have returned to 2000 levels by the end of 2013. Compared to 2010, the change is rather impressive for certain countries. As a result, even an appreciation of the Euro will not be catastrophic as long as world demand increases by a healthy amount. On the other hand, Germany will only be able to maintain its current REER.

Furthermore, the brutal internal devaluation in the periphery has led to a structural change in the German foreign trade: Its trade surplus is now only towards the extra-EU world with the intra-EU surplus projected to close completely in 2013:


As a result, Germany’s main source of growth is exposed only to world demand and is not insulated through low ULCs. It’s highly possible that an appreciated Euro will hurt its exports and lower its growth during 2013. Its primary budget surplus is projected around 1.5% of GDP while lower interest payments will lower net government demand further (from -0.9% net lending in 2012 to -0.7% GDP). If Draghi is successful, Germany could risk a recession next year.

Keeping on the subject of previous posts I ‘ll make a smaller post on the services balance during the Euro area.

The Ameco database does not provide services trade broken down between Intra and Extra-EU so only aggregate data are reported. The above chart makes it clear that the services surplus was quite stable moving from an average of 4% GDP before the Euro to a 6% surplus after the Euro introduction. Services imports were also very stable at 6% GDP making services exports the only source of volatility.

Going through scatter plots of the exchange rates and the services surplus leads to interesting results. REER of either EU-15 or the 35 industrial countries do not produce any significant relationship which probably suggests that labour costs had only marginal impact on the services sector. On the other hand, the NEER and the surplus show a strong upwards slopping trendline:

Normally a currency appreciation should lead to lower external demand. One assumption is that services exports are not actually related to the NEER but to other (global) trends. Nevertheless, no clear relationship emerges between global GDP or trade growth rates (using WEO data) and the services exports or surplus. The best fit comes from Euro area GDP growth data and services exports.

Interestingly, a strong relationship emerges if one examines the Brent US$ price and services exports which also suggests that exports are not driven by local factors:

In general, services seem to be relatively inelastic to labour costs and local developments, probably due to their global perspective. The following chart from the Levy Institute paper is helpful to determine exactly what role each services sector played in the examined period: